Search

The Art of Trading

Education is crucial to any investment or trading activities special for beginners. Remember you don’t want to loss those hard earn money. First, what is the difference between investing and trading?

According to Investopedia:

Investing and trading are two very different methods of attempting to profit in the financial markets. The goal of investing is to gradually build wealth over an extended period of time through the buying and holding of a portfolio of stocks, baskets of stocks, mutual funds, bonds and other investment instruments. Investors often enhance their profits through compounding, or reinvesting any profits and dividends into additional shares of stock. Investments are often held for a period of years, or even decades, taking advantage of perks like interest, dividends and stock splits along the way. While markets inevitably fluctuate, investors will “ride out” the downtrends with the expectation that prices will rebound and any losses will eventually be recovered. Investors are typically more concerned with market fundamentals, such as price/earnings ratios and management forecasts.

While trading, involves the more frequent buying and selling of stock, commodities, currency pairs (forex) or other instruments, with the goal of generating returns that outperform buy-and-hold investing. While investors may be content with a 10 to 15% annual return, traders might seek a 10% return each month. Trading profits are generated through buying at a lower price and selling at a higher price within a relatively short period of time. The reverse is also true: trading profits are made by selling at a higher price and buying to cover at a lower price (known as “selling short”) to profit in falling markets. Where buy-and-hold investors wait out less profitable positions, traders must make profits (or take losses) within a specified period of time, and often use a protective stop loss order to automatically close out losing positions at a predetermined price level. Traders often employ technical analysis tools, such as moving averages and stochastic oscillators, to find high-probability trading setups.

A trader’s “style” refers to the timeframe or holding period in which stocks, commodities or other trading instruments are bought and sold. Traders generally fall into one of four categories:

Position Trader – positions are held from months to years

Swing Trader – positions are held from days to weeks

Day Trader – positions are held throughout the day only with no overnight positions

Scalp Trader – positions are held for seconds to minutes with no overnight positions

Traders often choose their trading style based on factors including: account size, amount of time that can be dedicated to trading, level of trading experience, personality and risk tolerance. Both investors and traders seek profits through market participation. In general, investors seek larger returns over an extended period through buying and holding. Traders, by contrast, take advantage of both rising and falling markets to enter and exit positions over a shorter time-frame, taking smaller, more frequent profits.

Are trading and gambling the same?

According to Future Magazine Blogs Trading and gambling are similar in that they both attempt to create a capital gain, over a relatively short period of time, without creating new wealth. If I am a shoemaker, then my efforts create a pair of shoes that someone else can wear (new wealth), while I earn an income from cobbling. When I am a trader or gambler, I may earn an income, but there is no additional wealth created. Some markets experts would claim traders create market liquidity to the benefit of long-term investors, and that this in itself has value, similar to “new wealth” creation. But because trading and gambling involve capital transfer without capital creation they are viewed skeptically, especially when their outcomes are unpredictable. Society generally prefers the shoemaker-type endeavor because it creates something others find valuable.

Trading and gambling are both fundamentally stochastic, that is unpredictable, and because of this they are often viewed negatively. We feel an “honest effort” has more predictability to it, and we may hold those who take too much risk in disdain. However, many who have tried their hand at a new business will attest to significant luck when successful. The goal of new wealth creation, and the time needed to develop a successful business, act to mitigate the risks involved. But then, traders and gamblers will often describe many years of practice before becoming successful.

In the rush to invest in the stock market, some individuals may be worried about losing money in the endless swarms of transactions each day. In fact, men and women who engage in day trading are not being careless with their hard-earned money. They are instead using reliable financial indicators to buy and sell stocks, stock options, currencies, and futures contracts. Consider the following ways in which day trading falls outside the gambling arena.

Reason #1: Facts and Figures
While true gamblers are simply playing the available odds, day traders always examine the past performance of target stocks leading up to a purchase. As such, traders have a wealth of information at their disposal. Eschewing pure chance, individuals will be perfectly capable of using the tools of the market to determine which stocks they should buy. With the appropriate facts and figures, most investment attempts should turn out quite well.

Reason #2: No House Advantage
Unlike traditional gambling endeavors, there is no inherent house advantage in day trading. In Las Vegas, for example, this is how bookies ultimately make their money. In day trading, savvy investors will be dealing with markets that do not ultimately care whether they win or lose. With enough good information and a strong penchant for analysis, day traders will surely succeed in turning a profit.

Reason #3: Rationality and Reason
While gamblers are often pulled to their doom by raw emotion, day traders approach their jobs with cold rationality. If a certain stock is likely to perform badly over the coming days or weeks, most traders will simply ignore that particular stock for the time being. Men and women who do well with day trading are almost always lifted to success through logic and reason.

Reason #4: Slower Profits vs Fast Profits
Day traders are also perfectly happy to accumulate wealth a little at a time. This stands in stark contrast to gamblers, who are often looking to hit it big almost immediately. With slow, steady gains, traders will usually have an excellent chance of turning a long-term profit. Instead of engaging in hasty, high-risk bets, investors will buy and sell stocks in a coordinated, thoughtful manner.

The Bottom Line
Though day trading entails a certain degree of risk, it should not be intimately associated with gambling. Once people learn a bit about how the market works, they can use a variety of tools to achieve success in the financial arena. Positive results will surely follow quite soon